Proto Labs, Inc. — Q3 2016 Form 10-Q
Business and period: Proto Labs provides on-demand injection-molded, CNC-machined and 3D-printed custom parts. This unaudited quarterly report covers the three and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $78.2 | $67.8 | $225.7 | $190.3 |
| Gross profit / margin | $44.7 / 57.2% | $40.3 / 59.4% | $126.6 / 56.1% | $113.1 / 59.4% |
| Operating income / margin | $16.9 / 21.7% | $17.4 / 25.7% | $46.9 / 20.8% | $50.6 / 26.6% |
| Net income / diluted EPS | $12.0 / $0.45 | $12.4 / $0.47 | $33.3 / $1.26 | $34.5 / $1.31 |
- Growth and mix: Revenue rose 15.2% in Q3 and 18.6% for nine months. Q3 product-line growth was 10.7% in injection molding, 9.8% in CNC machining and 63.1% in 3D printing. International revenue grew faster than U.S. revenue, partly reflecting the Alphaform acquisition.
- Cash flow: Nine-month operating cash flow was $56.2, versus $41.3 a year earlier. Capital expenditures were $31.0; operating cash flow exceeded these expenditures by $25.2 before securities transactions. Investing cash outflow was $41.3 and financing cash inflow was $5.7.
- Liquidity and capital: Cash and equivalents were $68.2 at September 30, up from $47.7 at year-end 2015. Marketable securities totaled $107.4, bringing cash and securities to $175.6. Current assets were $159.8 and current liabilities $25.2. The balance sheet reports no debt balance.
Changes, outlook and risks
- Despite revenue growth, gross margin fell 2.2 percentage points in Q3 and 3.3 points for the nine-month period; operating income and net income declined. Management attributed margin pressure mainly to lower margins at acquired Alphaform, added manufacturing capacity, foreign-exchange effects and accelerated depreciation related to facility moves.
- Alphaform contributed $4.0 of Q3 revenue and $13.6 for nine months. Excluding Alphaform customers, unique product developers and engineers served increased 13.8% in Q3 and 17.2% for nine months; average revenue per such customer decreased 3.9% and 4.9%, respectively.
- The company discontinued Metal Injection Molding and Magnesium Thixomolding and exited Alphaform’s resin-resale business. Together, these activities represented about 1.4% of Q3 revenue and 1.9% of nine-month revenue. A $0.5 asset impairment was recorded during the nine months.
- Management expects cost of revenue to rise in dollars but remain relatively constant as a share of revenue, and expects continued investment in personnel, sales and marketing, research and development, and global operations. No specific revenue or earnings guidance is provided.
- Foreign-currency exposure is a stated risk; the company did not use forward contracts or currency borrowings to hedge it. Management said a hypothetical 10% adverse exchange-rate move could materially affect results of operations, though it generally would not materially affect financial position. Uncertain-tax-benefit reserves were $3.8 at quarter-end.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no litigation expected to have a material adverse effect and no material risk-factor changes beyond those disclosed in the Q2 2016 Form 10-Q.
Important facts for investors to verify
- How much of reported growth is organic versus attributable to Alphaform, and whether declining average revenue per customer stabilizes.
- Whether gross and operating margins recover as capacity investments and acquired operations are integrated.
- Whether 3D-printing growth continues and the discontinued processes and resin-resale exit affect revenue or costs further.
- Capital-spending requirements, cash conversion and liquidity, including the composition and maturities of marketable securities.
- Exposure to foreign-exchange movements and developments in the $3.8 of reserves for unrecognized tax benefits.